IRS tax code offers perks to taxpayers of a certain age
By Patricia Amend, AARP Published January 28, 2022 /Updated January 31, 2023
If you’re 50 or older, there is one benefit to reaching this milestone that you may be overlooking: tax breaks aimed right at you. Now you can contribute more to your Roth or traditional individual retirement account (IRA), to your employer-sponsored plan or to your health savings account (HSA) than you could when you were younger. You can even exclude more income from your tax computations.
Congress included some of these provisions in the Economic Growth and Tax Relief Reconciliation Act, which took effect in 2002, out of concern that the boomer generation had not saved enough for retirement. Congress included other tax-saving provisions, such as a bigger standard deduction, in the Tax Cut and Jobs Act of 2017.
If you’re behind on your retirement savings, the tax law gives you a chance to catch up. And if you’re in retirement, or near it, the tax code allows you to pay a bit less in taxes. That’s a combination you shouldn’t pass up.
Contribute more to your retirement fund
For 2023, the contribution limit for employees who participate in 401(k) and 403(b) programs, most 457 retirement saving plans and the federal government’s Thrift Savings Plan has been increased to $22,500, from $20,500 in 2022. Employees 50 and older can contribute an additional $7,500 (up from $6500 IN 2022), for a total of $30,000.
The contribution limit for a traditional or Roth IRA is $6,500 for tax year 2023. The catch-up is $1,000, the same as for 2022. It is $3,500 for a Savings Incentive Match Plan for Employees (SIMPLE) plan, up from $3,000 in 2022.
Many folks are missing this opportunity. Despite generous catch-up provisions for those 55 and older, just 16 percent of those who are eligible are making these contributions, according to the Vanguard Group’s “How America Saves 2022” report.
At the same time, data from the National Retirement Risk Index compiled by the Boston College Center for Retirement Research indicates that half of American households won’t be able to afford their current standard of living once their regular paychecks stop. As of June 2020, 50 percent of married retirees were relying on Social Security payments for at least half of their income; for single people, that number was 70 percent. As of November 2022, the average Social Security retirement benefit is estimated at just $1,632 a month.
Those retirement contributions can lower your tax bill
Aside from making your retirement more comfortable, contributing to a tax-deferred retirement plan, such as an IRA or a 401(k), also reduces your taxable income — which, in turn, reduces your income taxes. Thanks to that reduction in taxes, increasing your contribution won’t take as much of a bite from your paycheck as you might think. If you earn $75,000 a year, for example, a 5 percent contribution to your 401(k) would put $144 into your account for each biweekly paycheck. Assuming a 25 percent tax rate, your take-home pay would fall by just $108, according to Fidelity Investments.
Contributions to a traditional IRA are tax-deductible as long as you meet IRS rules, including income limits. IRA contributions are fully deductible if you (and your spouse) aren’t covered by a retirement plan at work. However, the deduction may be limited if you are (or your spouse is) covered by a workplace retirement plan and your income exceeds certain limits. For 2023, IRA deductions for singles covered by a retirement plan at work aren’t allowed after modified adjusted gross income (MAGI) hits $83,000; the deduction disappears for married couples filing jointly when MAGI hits $136,000.
Retirement contributions made to a Roth IRA or Roth 401(k) are done on an after-tax basis: You get no up-front tax break for these contributions, but withdrawals taken from Roths in retirement are tax-free. The pretax money in traditional IRAs and 401(k)s grows tax-free, but you’ll eventually pay taxes when you start making withdrawals in retirement.
Clark Randall, a certified financial planner at Financial Enlightenment in Dallas, encourages his clients to rethink their budgets to increase their regular retirement contributions throughout the year. “Budgeting for this expense is the same as any other. It takes discipline and compromise.”
If you still want to make catch-up contributions to a traditional IRA or Roth IRA for 2022, you have time. The deadline is April 18, the filing date for your tax return, unless you file for an extension. However, 401(k)s, 403(b)s, Thrift Savings Plans and most 457 plans go by the calendar year, so you’ll be investing for 2023 and have until the end of the year to do so.
You can wait until 72 to start your RMDs
Speaking of which, there’s also good news on required minimum distributions (RMDs), the minimum amount you must withdraw from a tax-deferred retirement plan, such as a traditional IRA. (Roth IRAs don’t require distributions while the owner is alive.)
Under rules that kicked in in 2020, you can wait until the year in which you reach age 72 before having to start taking RMDs. (For your first RMD payment, you can wait until April 1 of the following year, but you’ll also have to pay an RMD in December of that year.) Previously, the age was 70.5. If you don’t need the RMD, consider donating it to charity. If you donate your RMD to a qualified charity directly from your retirement account, up to $100,000, you won’t owe income tax on the distribution.
Don’t forget your HSA
If your employer offers a health savings account (HSA), you’ll want to make sure to take full advantage of it. The IRS allows you to deduct your contributions to your retirement account from your gross income, even if you don’t itemize, and those made by your employer are excluded from your gross income, too. Any earnings are tax-free. Your distributions aren’t taxed, provided you use them for qualified medical expenses, of which there are many — from ambulance rides to X-rays. Plus, the account is yours: You can take it with you to a new job and use the funds in retirement.
For 2023, you can contribute up to $3,850 if you have coverage for yourself, or up to $7,500 for family coverage. The catch-up is an additional $1,000 if you reach 55 during the year. However, your contribution limit is reduced by any amount your employer contributed that has been excluded from your income.
You get a bigger standard deduction at 65
The standard deduction, which reduces your taxable income and, in turn, lowers your tax bill, gets better with age. In 2023, when you fill out your federal income tax forms for income earned in 2022, married couples will get a standard deduction of $25,900. For single taxpayers and married individuals filing separately, the standard deduction rises to $12,950.
If you are 65 or older and file as a single taxpayer, you get an extra $1,750 deduction for tax year 2022. Married and filing jointly? The extra standard deduction is less per person if only one person is 65 or older — $1,400 for the tax year. If both are 65 or older, the standard deduction increases by $2,800. For taxpayers who are both 65-plus and blind, the extra deduction is doubled.
The only drawback for some taxpayers with the higher standard deduction is that it sets a very high bar for itemizing deductions. It doesn’t make sense to itemize if your deductions aren’t higher than the standard deduction. Nevertheless, a deduction is a deduction, and getting a larger standard deduction is something to cheer about.
Bonus: If you’re 65 and up and have a straightforward return, you might be able to use the new simplified Form 1040-SR for seniors. It has larger type for those who still file taxes by paper, there are places to enter such things as Social Security benefits and retirement distributions, and there’s a handy chart that shows the bigger standard deductions.
Your $600 charitable deduction is gone
Because the standard deduction is so high, many people are no longer able to itemize their deductions. (It makes no sense to itemize if you get a bigger bang for your buck from the standard deduction.) For tax year 2021, however, a person filing a single return could take a $300 deduction for cash gifts to qualified charities. Those filing jointly could take $600. You could take this deduction if you took the standard deduction but not if you itemized.
Alas, those days are gone. The $600 charitable deduction isn’t available for 2022.
AARP Foundation Tax-Aide locations open in early February. Photo Credit: Greg Kahn
AARP Foundation’s Tax-Aide is the nation’s largest free filing program, and it’s aimed at taxpayers who are 50 or older. It’s available across the country and staffed by volunteers who are certified by the Internal Revenue Service (IRS). You don’t even have to be an AARP member. Did we mention that it’s free?
Tax-Aide locations open in early February. You can visit a Tax-Aide office in person or check in virtually. You have seven options, most of which include filing electronically – the fastest way to get a refund. (You can also print out your return, sign it and mail it, but you’ll face a longer wait time for the IRS to process it.)
If you want to visit in person, we recommend you make an appointment to cut down on wait times. Book an appointment now using the Site Locator tool, which will find a Tax-Aide site near you. If you would like to receive the latest information on Tax-Aide, sign up for SMS text alerts from AARP Foundation Tax-Aide.
Patricia Amend has been a lifestyle writer and editor for 30 years. She was a staff writer at Inc. magazine; a reporter at the Fidelity Publishing Group; and a senior editor at Published Image, a financial education company that was acquired by Standard & Poor’s.
